Rio’s Mongolian misery

Operating in emerging countries has its own unique risks

a woman

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Resources giant Rio Tinto Limited (ASX: RIO) is facing more issues at its multi-billion dollar Oyu Tolgoi copper and gold mine in Mongolia.

Oyu Tolgoi is one of the world’s largest undeveloped copper and gold assets, with a measured and indicated resource estimated at 41 billion pounds of copper and 21 million ounces of gold. Over its life, Oyu Tolgoi is expected to produce an average of 425,000 metric tons of copper and 460,000 ounces of gold a year. Upon completion, the mine will account for more than 30% of Mongolia’s gross domestic product.

Rio is managing the development of the massive mine, and owns a 51% stake in Turquoise Hill, a Canadian listed miner (formerly Ivanhoe Mines), which in turn holds a 66% stake in the project. The Mongolian government owns the remaining 34%. As an interesting aside, Oyu Tolgoi is Mongolian for “turquoise hill”.

Disputes between the partners appears to be increasing in frequency. Now it seems the Mongolian government is refusing to support Rio’s plans to raise as much as US$6 billion to fund the next phase of development, and has queried the projects rising costs.

Both parties have agreed to keep funding the project, keeping it on track to begin producing in June 2013, while they try to resolve the dispute over costs.

Earlier this week, Mongolia suspended two mining permits for Entree Gold, a Canadian gold and copper explorer, partly owned by Rio that had been prospecting on land surrounding Oyu Tolgoi.

Mongolian officials have also complained that Rio hasn’t been transparent about the Oyu Tolgoi operation, and has structured the project’s capital to suit the miner, at the expense of the government.

In October last year, Rio and Turquoise Hill were forced to publicly reject an appeal from the Mongolian government to renegotiate the investment agreement. Rio has stood its ground, suggesting any attempt to renegotiate the agreement could jeopardise the second stage of development, and seriously impact on foreign investment in Mongolia. ASX-listed Haranga Resources (ASX: HAR), Aspire Mining (ASX: AKM) and Xanadu Mines (ASX: XAM) are just three Australian companies that could pull out of the country.

Foolish takeaway

These issues show how difficult it is for miners to operate in foreign countries – especially when there are large sums of money at stake. Rio will be hoping Mongolia doesn’t go down the same track as Zimbabwe, which has repossessed claims, seized mines and forced foreign miners to hand over 51% of their mines to locals.

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